Huntington Ingalls Industries [HII] yesterday reported that it swung to a loss in the third quarter due to goodwill impairment charge related to a drop in its market capitalization although operating income, excluding the charge, at its Ingalls and Newport News units was up.
The $300 million impairment, which led to a $248 million, $5.07 earnings per share (EPS), loss in the quarter stemmed from a decline in HII’s stock price, which in turn lowered its market capitalization, triggering a goodwill review that resulted in the non-cash charge. Excluding the charge, adjusted net income was $52 million ($1.05 EPS), topping consensus estimates by 20 cents. Net income a year ago was $42 million (86 cents EPS).
HII’s adjusted income benefited from performance improvements on the Virginia-class submarine program at Newport News Shipbuilding and the lack of any big charges at the Ingalls unit, which took a hit a year ago for some additional work on the LHD-8 Makin Island amphibious assault ship.
Sales in the quarter fell 4 percent to $1.6 billion from $1.7 billion, driven lower volume on a refueling and overhaul program for the aircraft carrier Theodore Roosevelt and less engineering work on the carrier Gerald R. Ford.
The company doesn’t provide guidance but continues to say that revenues will remain relatively flat through 2015 with margins expected to reach 9 percent by then. Total operating margins in the quarter, adjusted for the charge, were 6.9 percent, up 2.3 percent from a year ago.
HII remains on track to deliver the LPD-22 amphibious transport dock by the end of this year, followed by LPDs 23 and 25 next year and LPD-25 in 2013. The LHA-6 amphibious assault ship is slated for delivery in 2013. Risk remains on all of these programs, which were contracted for in the wake of Hurricane Katrina in 2005, but progress on them is being made, Mike Petters, HII’s president and CEO, said on yesterday’s earnings call.
Once those ships are delivered to the Navy, HII believes its operating profits will gather steam.
Petters said HII expects to capture half of the new DDG-51 destroyer contracts after losing out to General Dynamics [GD] in a recent award (Defense Daily, Sept. 27). HII received a contract for DDG-113 in June and then another for DDG-114 in September, when the Navy awarded GD’s Bath Iron Works division contracts for DDG-115 and DDG-116. The award for DDG-116 was an option that was essentially competed between the two companies.
Petters expects the competitive awards for the next batch of DDG-51 Arleigh Burke-class destroyers to also be contracted next fall.
There haven’t been any contract award delays due to the challenging defense budget environment, Petters said, but contract negotiations have been tough, with some things taking longer to get a “common view of risk” in programs.
The company continues to plan for the eventual shutdown of its Avondale shipyard in Louisiana, Petters said. However, HII is exploring the possibility of working with an operating partner and finding potential markets for ships built there after the State of Louisiana offered incentives to keep the yard open and the Navy agreed to let the company explore alternatives without giving up its rights on restructuring costs and closure, he said.
HII’s orders in the period were $2.1 billion and backlog stood at $17.3 billion.